Shares in retail conglomerate Woolworths Group Ltd (ASX: WOW) are up nearly 2% in early trading on Tuesday, fetching $35.25 a share at the time of writing.
It's been a mixed bag for Woolworths so far in 2022, with its shares dropping 7% in the red after a shaky start to the year.
This has effectively erased the bulk of gains earned over the last 12 months. The Woolworths share price is now around 2% in the green during that time.
Below is a chart of the retailer's recent performance against the S&P ASX 200 Index (ASX: XJO).
However, one broker is seeing past the short-term noise and is urging its clients to buy Woolworths with an upside potential of around 14% as at today's opening price. JP Morgan outlines four reasons for buying Woolies shares in its investment analysis on the company.
Is Woolworths a buy?
Analysts at JP Morgan tip Woolworths to have a bumper year in 2022.
The broker's analysis centres around Woolworths' core operations that, it says, held strongly during the pandemic or have firmly recovered from its effects.
The first buying factor boils down to growth in key segments like food (fresh and perishable) and operating cash flows, JP Morgan says.
"Food LFL [like for like] sales growth supported by local, online and ongoing execution capabilities, as Woolworths continues to execute across its strategy of convenience, fresh and range," analysts say.
"Operating leverage, falling COVID-19 costs and lower labour inflation are supports for EBIT margin expansion."
Secondly, the Everyday Needs segment is performing well and is a key differentiator to Woolworths' earnings and, therefore, the investment case, the broker says.
"The Everyday Needs ecosystem leverages and extends the competitive advantages of the Food business, while adding to [its] earnings growth."
Thirdly, Big W, the company's chain of discount department stores, has apparently shown a strong turnaround and "has been a positive", according to the broker.
That's important to consider, analysts say, seeing as department stores across the country were severely impacted by COVID-19 lockdowns. It seems Big W has passed the broker's litmus test for "further opportunity due to DC [distribution centre] and store network optimisation".
Finally, JP Morgan believes Woolworths is at the tip of the spear when it comes to its online platform, suggesting the group has a better offering in the post-COVID world.
Analysts believe this could put Woolworths in an above-market growth position, tipping its online penetration could easily more than triple in FY22.
"We view Woolworths' market-leading online platform favourably and see sustained levels of high online penetration post-COVID. After a period of normalisation, we expect online penetration to continue to grow to ~14% over the next five years (versus 4.2% in CY19)," the broker concluded.
JP Morgan rates Woolworths a buy and values the company at $39.50 per share, suggesting a potential for decent upside should its thesis play out.
Woolworths share price snapshot
In the last 12 months, the Woolworths share price is up around 2%, however, is down 7.2% this year to date.
During the past 30 days of trading, Woolies shares have risen around 2% but are down marginally over the past week. With these returns, Woolworths is trailing the broad index's performance this year.
